Our investment strategies share a common set of
- Low absolute return volatility
- Preservation of capital
- Consistent outperformance of a fixed income benchmark
In managing all of our fixed income portfolios and
products, we adhere to a set of core philosophical tenets. These philosophies
have been in place since our inception, and we consistently apply them.
While our philosophy remains constant, as technology and markets evolve
we re-exam the processes by which we execute this philosophy.
- We emphasize fundamental, bottom-up research as
our primary tool to add value. This approach, and our comparatively
modest size, has enabled us to produce competitive returns at low relative
- The macro elements of fixed income investments
(interest rates, sector spreads, etc.) revert to a long-term fundamental
average or mean.
- We seek to add value across a wide variety of sectors and issues, and often exploit areas of the market that are overlooked by other managers.
- Short-term technical factors can cause fixed income
pricing to temporarily dislocate from equilibrium. Consequently, we tend to increase our exposure to an out-of-favor
issue or asset class in response to an adverse movement in price. In this way, we can prudently lower the overall
cost basis of a position via the well understood process of dollar cost averaging.
- Bottom-up issue selection, when used in combination with top-down investment strategies,
can lead to strong absolute risk-adjusted returns.
- We are an active fixed income manager, and as such we take active management, non-benchmark
positions. We make value-driven tactical and opportunistic investments.
- Given our comparatively modest asset base, we are generally able to construct
portfolios with less systematic market risk exposure and more idiosyncratic,
issuer-specific exposure. We view this as a significant advantage, as
historically this approach has worked well in down markets by producing
a pattern of returns less correlated with our major competitors. Of
course, past performance is no guarantee of future results.
- We use a value-oriented approach and appreciate the mean-reverting nature of
fixed income instruments. We believe significant alpha can be generated
by applying fundamental research to identify securities whose market
prices temporarily do not reflect fair value. We do not believe it necessary
to routinely take significant positions or risks relative to our outlook
on macro factors (such as duration).
- Market volatility often leads to attractive values because securities are sold for non-fundamental
reasons. In a measured, disciplined fashion, MetWest attempts to capture
the value opportunities often presented by such volatility.
- We are not anchored to benchmarks. We constantly monitor our active risks relative
to benchmarks, but our construction process is based on independent
assessment of value and absolute risk, not tracking error limits. We
seek to provide clients with predictable absolute volatility, and our
portfolios consistently produce low relative standard deviations.
- We employ a collaborative approach to the management of fixed income
assets. Our entire investment management team of over 30 professionals
is large enough to identify and seize opportunities, but small enough
to sit together in one large trading room. We have one coordinated and
collaborative team, not multiple trading desks or competing internal
Our approach to risk management is rooted
in our belief that a thorough understanding of the fundamental
risk characteristics of each individual security is critical
to controlling portfolio volatility. Thus, we focus on quantifying
prospective downside volatility at the security and portfolio
levels through stress testing and scenario analysis. We seek
to avoid issues where downside volatility is extreme or difficult
to quantify, and limit position sizes according to expected worst-case
volatility, and in most cases we limit non-government position
sizes to 2.5%. Similar to our approach to individual issues,
we perform exhaustive scenario analysis at the portfolio level.
The following PDF provides additional details
about our approach to risk management:
MetWest Risk Management